In April 2024, the International Monetary Fund (IMF) revealed that Nigeria’s gross domestic product (GDP) will decline to $253 billion in 2024, driven primarily by the devaluation of the naira. In naira terms, however, Nigeria’s GDP is projected to reach ₦296.4 trillion, up from ₦234.4 trillion in 2023. Nonetheless, data from the last decade shows that Nigeria's GDP has grown by just 1.93%, while GDP per capita experienced a negative growth rate of -0.57%.

These poor growth numbers have dire consequences for Nigerians, as population growth averaged 2.5% in the last decade. Before 2015, the Nigerian economy experienced a GDP growth of 7.15% between 2000 and 2014. GDP per capita growth also averaged 4.3% during the same period. The Nigerian economy has moved from being one of the fastest-growing economies in the world to experiencing a significant downturn. Several challenges and policy missteps have overshadowed the once-vibrant economy.

The initial signs of trouble for Nigeria Post-2015 were the fall in crude oil prices, which led to the depreciation of the naira, falling by ₦61.05 between 2015 and 2016 at the official market. There was also a reduction in crude oil output due to the return of hostilities in the Niger Delta. Also, the newly elected administration at the time failed to appoint ministers in the first six months in power, which led to uncertainties about the direction of economic policies.

The post-2015 period has been characterised by rising inflation and unemployment, which economists refer to as stagflation. Nigeria has also experienced significant devaluation and depreciation of the naira, as well as increased poverty levels. A combination of poor policies, policy failures, and internal and external shocks has characterised the Nigerian economy in the last decade and eroded the gains in the previous years.

Trends in Data

Figure 1 shows Nigeria’s annual GDP growth and GDP per capita growth between 2000 and 2024 Q1. From 2015 to 2016, Nigeria’s GDP fell significantly, reaching -1.61% in 2016, driven primarily by the fall in crude oil prices and a depleted excess crude oil reserve, which had previously helped Nigeria mitigate the effect of the 2007 global financial crisis. 2016 witnessed the first economic recession in decades, with a follow-up recession four years later in 2020.

Figure 2 shows the headline inflation and food inflation from January, M1 2015, to April, M4 2024. A clear trend is the sharp increase in both inflation and food inflation in 2016, following a crude oil price shock, among other increases in subsequent years. Economic theory traditionally suggests that during recessions, prices tend to decrease. However, Nigeria's recessions were marked by an upward trajectory in the price level. This phenomenon was similarly observed in 2020, at the peak of the coronavirus pandemic.

Figure 3 reveals the daily trend in both the official and parallel market exchange rates. The figure shows a significant depreciation of the naira in both the official window and the parallel market over time. Firstly, it should be highlighted that the jump in the official exchange rate in 2016 was due to the fall in crude oil prices and the recession that followed, as previously highlighted. This can also be observed in 2020, when the pandemic, the subsequent disruption in the global supply chain, and the fall in crude oil prices, depreciated the naira. It must also be known that under a flexible exchange rate regime, the exchange rate signifies the health and productivity of an economy. The high depreciation of the naira since the government’s “floating” policy in 2023 is a clear signal of Nigeria’s weak economy.

Key Events that Have Contributed to Nigeria’s Poor Growth

2016 Fall in Crude Oil Prices: The global fall in crude oil prices in 2016 resulted in a significant decline in Nigeria's crude oil revenue. During this same period, disruptions in crude oil production in the Niger Delta exacerbated the situation. Combined with a significant drop in excess crude oil reserves, Nigeria could not sustain the GDP growth gains of previous years.

According to the CBN, the average crude oil price in 2016 was $43.81, a drop from $100.4 in 2014. Similarly, crude oil production averaged 1.82 million barrels per day, a decline from 2.2 million barrels per day in 2014. Additionally, the decline in oil prices and production led to a decrease in dollar liquidity, which in turn caused the naira to depreciate. This depreciation contributed to higher inflation and dampened productivity, further straining the Nigerian economy.

Persistent Insecurity: The last decade has been fraught with new security threats that have compounded existing security threats in the northeast. In particular, farmers-herders conflict across Nigeria has resulted in a decline in farm activities, which has constrained agricultural productivity.

The call for an independent state in the region has also become more violent in the Southeast. For context, Southeastern Nigeria contributes significantly to Nigeria’s GDP. In 2022, Imo State had the second-largest GDP in the country, highlighting the potential for further growth in a more peaceful environment.

The last decade has also witnessed rampant levels of kidnapping that have caused disruptions in business operations and a stall in tourism development. Overall, persistent insecurity stunts economic growth by creating an environment of fear and uncertainty, limiting opportunities for economic growth and development.

2019 Border Closure: In August 2019, the government closed Nigeria’s land borders. According to the federal government, one major reason for this was to raise agricultural productivity. The intuition behind this was that by closing the land borders, there would be less competition for Nigerian farmers, ultimately reducing competition and boosting productivity. However, such a policy has always not had the best results in reality. For Nigeria, the closure of the land borders only led to increased food prices.

Food inflation rose from 13.17% in August 2019 to 16% by August 2020, highlighting the theoretical conclusion that trade embargoes lead to welfare losses for households. This rise impacted GDP through a decline in consumer spending in the non-food sector, slowing economic growth. It is noteworthy that despite the closure of the land borders, the growth rate of agricultural productivity declined, signifying the complete failure of the policy. According to the World Bank, by 2022, agricultural productivity had lost 0.48 percentage points in growth compared to 2019 growth numbers.

The Coronavirus Pandemic: The effect of the border closure was further compounded by the COVID-19 pandemic. The pandemic disrupted supply chains, both domestically and globally, affecting the availability and prices of goods. It was also characterised by import and export delays, halts in production, and business closures that saw GDP growth drop to -1.795 in 2020.

Ukraine-Russia War: The conflict in Ukraine led to a significant disruption in the supply of commodities such as wheat, fertiliser, and energy. Both Russia and Ukraine account for about 30% of global wheat exports. Russia is also a key oil and natural gas supplier, contributing 11% to crude oil exports and 20% to natural gas exports. The war resulted in an increase in global food and energy prices, limiting Nigeria’s growth potential through the increase in both the cost of production and food prices.

Naira Redesign Policy: The redesign of the naira was implemented to significantly reduce the money in circulation and improve the effectiveness of monetary policy. While this policy had merit, its implementation was poorly executed. The policy caused a cash shortage and created black markets for selling naira, creating some sort of economic stagnation and difficulty for businesses and households. The policy contributed to the decline in the growth rate of GDP, from 3.5% in Q4 2022 to 2.3% in Q1 2023.

Devaluation of the Naira: A key policy highlight in 2023 was the devaluation of the naira. The primary aim was to float the currency and stop arbitrage. However, the devaluation of the naira came with unanticipated consequences. It led to an increase in the cost of imports, which fed directly into the increased cost of production and inflation numbers. In 2022, Nigeria's import bills stood at about ₦27.1 trillion, revealing the overdependence of the domestic economy on imports.

When countries devalue their currencies, the goal is to increase demand for exports as domestic goods become cheaper than goods from other countries, leading to increased exports and GDP. However, the Nigerian economy has a poor export base and depends significantly on imports for both producer and consumer goods, which has outweighed any benefit Nigeria could get from the devaluation of the currency. This has negatively impacted the growth of the economy.

Fuel Subsidy Removal: In May 2023, the Nigerian government announced the removal of fuel subsidies. According to the government, subsidising fuel has become unsustainable, and the funds can be channelled into other productive government endeavours. The removal of fuel subsidies increased transportation costs, which led to an increase in price levels. This has impacted every sector of the Nigerian economy by increasing production and costs, and it has also affected consumer spending and its patterns, limiting economic growth.

The Nigerian economy over the last decade has been characterised by several challenges that have significantly dampened economic growth. These factors include both internal and external factors, policy missteps, and policy failures. The country's shift from rapid economic expansion to stagnation highlights the urgent need for effective, robust economic strategies to restore growth. The consequences are dire for the average Nigerian, and without urgent and decisive actions, the dream of a prosperous Nigeria may remain elusive.

References

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